by Richard Johnston
Chartered Financial Planner
Do you recall at the start of the very first lockdown last March, when we all became aware of the positive impact it was having on the environment? The green canals of Venice, the blue skies over Delhi and the sound of birds, loud and proud, in even the most urban of environments?
This made many people think a lot more about our impact on the planet and how we might do more to protect it.
But many of us might already feel as if we’re trying our best: recycling our waste, using energy efficient bulbs and shopping locally. What else could we do?
What if we said you could make sustainable choices through your investments?
It’s true, pension funds don’t usually appear in the same article as saving polar bears or the Australian forests. However, all that could be about to change.
Under a new directive, financial advisers will be offering clients more Environmental, Social and Governance (ESG) fund choices.
What is ESG investing?
ESG investing is investing in companies who score highly on their commitments towards environmental and societal responsibility. These are as decided by research groups or independent companies who provide a handy metric to compare different investments.
Here are the three components used to evaluate companies for ESG investing:
- Environmental: What impact does the business have on the environment? A number of important factors are taken into account, such as carbon footprint, fossil fuels, toxic chemicals and much more.
- Social: This addresses the social impact the business has both internally and in the broader community. Social factors include everything from gender equality and employee treatment to racial diversity through ethical supply chain sourcing.
- Governance: The corporate governance component refers to how the board of directors are driving positive change. This encompasses many internal issues regarding equal pay, diversity and how the leaders of the company interact with shareholders.
This is all great for the halo, but what you might well wonder about is performance?
What if we told you there’s actually evidence to suggest that socially responsible investing could offer performance advantages?
Ten years ago, if you’d wanted your investments to support good causes and facilitate change for the better, you would have had to make some compromises with your returns. Profitability was limited. Risk was higher. And investment diversification was sparse.
But the world has changed.
Businesses who strive to make the world a better place now operate on a more level playing field where investors no longer have to make that torrid tussle between their morals and their capitalistic endeavours. This means you can now blend profit with philanthropy in your portfolio and fund businesses whose support for initiatives are closest to your heart.
But you might be wondering whether any of this has the potential to drive significant change?
The short answer is yes. Earlier this year it became a mandatory requirement for all advice firms to present clients with a palette of ESG investment options. Being part of this collective move to become more responsible investors is more likely to help facilitate widespread change.
But over the long term; ESG is currently in its infancy, so we can’t expect those clear canals of Venice to become a permanent feature just yet.
It may be a long road, but we believe the destination will be worth it. And it certainly makes this an exciting time for investors who want to make a difference.